VAT decision threatens charity’s future

A homeless charity has hit out after being handed an unexpected bill by HMRC. Caritas Anchor House, which operates in East London, said hundreds of its service users will be put at risk after it was charged an additional £1m in VAT for work to build new facilities.

The additional charge relates to the Catholic charity’s construction of ‘move on’ flats, designed to help homeless residents transition back to independent living.

The VAT was incurred after HMRC reviewed the charity’s description of services, determining that their definition as a ‘residential and life skills centre’ rather than a ‘homeless hostel’ left it subject to VAT.

Established in 1962, Caritas Anchor House provides accommodation for 230 homeless people a year. It also works with vulnerable groups, including those experiencing substance misuse, domestic abuse and mental health problems.

Responding to the decision Keith Fernett, the charity's chief executive, said: “HMRC’s application of VAT in this case is devastating to our work and to the vulnerable people we support. We believe we’re being unreasonably penalised for accurately describing our operations despite not changing what we do.

“We have worked incredibly hard to deliver a level of service with a reliance on donations and relatively little government funding. We hope HMRC will reverse its decision, and allow us to continue making a huge difference to people’s lives. Otherwise our work is at risk, and local authority services will be put under greater pressure”

The unexpected cost has forced the charity to postpone the development.

Though the additional bill currently stands at £1m, the full cost could rise to £1.5m, once costs to halt the development and challenge the decision are included.

A statement on the charity’s website said they had “previously been given advice that our VAT liability for the development would be £250,000.”

HMRC told AccountingWEB that they do not comment on individual case, but added they were willing to work with the charity to resolve payment issues: “VAT status is a matter of law, determined by the nature and activities of the individual organisation.

“Although the tax payable in law has to be paid, we will always provide practical support and advice when approached.

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have a story that might interest us or wish to comment on the site's coverage get in touch via the site's private message function or Twitter DM ( @AWebTom )

Seems pretty clear cut that they will lose. It's time charities were allowed to claim back all VAT they incur. Sometimes I think politicians think that is what being exempt means.

I would go further:

1) All things undertaken for the benefit of society as a whole should be treated beneficially from a tax viewpoint

2) Simplification of taxation is to be encouraged wherever possible

Based on the above strategy we should be striving to seek that zero rating applies to supplies made in the case of chartity work, fund raising, provision of healthcare commercially or by NHS and education commercially or by Universities - stop the stupid exempt status of such supplies with all the complexities that this brings. If this is said to be against EU / EC rules then quit the EU / EC. EU/EC want us in their club because UK imports more goods from EU / EC than it exports to EU / EC. UK contributions to EU / EC budget would be sorely missed.

OK, I appreciate the that the net VAT yield would drop with the above measures but this should be handled by other taxation and public ependiture measures such as firstly stopping the concept of defined benefit pension schemes for public sector workers, reduced contributions to EU / EC and then if there's still a budget shortfall then an increase in VAT standard rate.

HMRC are not concerned with the benefits to humankind they will make their own interpretation using the minutiae of the Vat law. I have experienced this in the past regarding charities and the practical application of their objects clause.

First step is to obtain counsel's opinion (minimum cost) on where you stand to establish whether you have a case. Pulling at heart strings won't work!

Warning to us all, be so careful how we describe things, its best to check the rules and work backwards. 'residential and life skills centre' sounds to me like poncy management speak, rather than an accurate description of services they offer.

Extract above:-

The VAT was incurred after HMRC reviewed the charity’s description of services, determining that their definition as a ‘residential and life skills centre’ rather than a ‘homeless hostel’ left it subject to VAT.

HMRC is rightThe article doesn't give clear picture. It doesn't say about the surplus. Its not residential units and used only in transition, I don't find diffrence from commercial institute.
Private schools have charitable status. It needs to understood why.
In India all temple's incime is taxable where Mosque or Church income is not. Therefore, its only fair to impose tax on any Catholic institution as they dont belong to Anglican church.
Charity in the UK is scandalous. So, its about time some of their money is clawed back for common good.

Customers must be treated fairly, so doesn't the real substance of the development need addressing? Some decades ago, the concept of 'substance over form' was brought in to ensure that accounts are correctly interpreted for tax. Is this concept still around and could this idea be applied here in the interpretation of the VAT law ? This development seems to be firstly a homeless hostel. Surely a tax barrister can find a way to appeal the decision? I look forward to hearing of a better outcome in the end. We need justice, and judges that interpret the law in a compassionate and just way.

Fairness??You see all those incommers from Lybia Syria are categorised as migrants or immigrants but in fact they are refugies resulting from indiscriminate bombardments on other sovereign nations which began from Surbia.
this technique is a pretext that will deter this organisations from giving free rides which has made England a lucretive and most desirable destination.
I admit its a grusome gesture but se la vi..

It appears that they were given advice at some point- and I'd be very surprised given the size of the development if they had not sought and been given professional advice by a firm of VAT experts.

Time to sue the advisers? Trustees to look at the management competence?

I deal with property issues a lot from a tax standpoint and the one thing I do every time VAT raises it's head is refer that on to a firm of VAT People, who then provide chapter and verse for a very reasonable cost (and who then protect me from any HMRC challenge provided we follow the advice given).

Without seeing the detailed judgement it seems very flimsy for HMRC to start using people's descriptions of what they do as a basis for determining the tax status, especially given the flowery language many public institutions use to describe themselves- such as us all being 'customers' of HMRC, like we have a choice...

Decisions should be based on facts, not on management speak descriptions- 'vice president in charge of sanitation' sounds great until you review their job and find out they are the toilet cleaner (and I applaud everyone who does that job, thank you!). A bit like 'senior consultant' at a financial services firm:-)

A harsh decision, and not according to most principles of fairness or natural justice, but it is the law that a Charity's purposes (gov.UK speak for the objects) define the limits of what the trustees can do. https://www.gov.uk/guidance/how-to-write-charitable-purposes. And in fact this is a necessary safeguard to discourage a charity from operating way outside its remit e.g. putting a swanky new swimming pool in the Chairman's back garden!

It is a timely reminder for all of us involved with any charities that the object should be kept up to date with what the charity is doing and vice versa. I think this should be checked at least briefly every year, as well as whenever a major new venture is undertaken. With one of the charities I am involved in, I always take another look at the objects as well as the other "soft data" on the Charities Commission Website when submitting the annual return.

It is very easy, particularly with smaller charities, for an accountant to be concerned with getting the finances correct in terms of normal compliance and leave things like the Objects clause to the Trustees. Meanwhile the Trustees, who are often volunteers with no special legal or financial expertise, are keen to do what the charity was set up to do. They acknowledge the need to work with the Treasurer and accountant to get the figures right, but the object is just that part of the constitution that has always been there, so no-one thinks of revisiting it.

And of course what will increase Trustees' reluctance to change a charity's object is that Charity Commission consent is needed to do this with the rear of accompanying extra hassle unless the power is expressly given in the charity's own governing document.

Thanks Melody for the timely reminder, but I dont think that is the problem here. According to the charity commision database, the objects of Caritas Anchor House are:

THE CHARITY'S OBJECTS ARE TO FURTHER THE GENERAL CHARITABLE WORKS OF THE ROMAN CATHOLIC CHURCH BY PROVIDING SERVICES AND FACILITIES FOR THE RELIEF OF POVERTY AND SUFFERING, THE ADVANCEMENT OF EDUCATION, THE PROMOTION OF SOCIAL JUSTICE AND OTHER CHARITABLE ACTS WHICH PROMOTE THE DEVELOPMENT OF ALL INDIVIDUALS AND COMMUNITIES IN NEED FOR THE PUBLIC BENEFIT OF PEOPLE OF ALL FAITHS AND NONE.

A more detailed analysis of the case might indicate why the property use is considered to be neither "relevant residential" nor "relevant charitable."

Having followed the link to the charity's website it would appear to my non-legal mind that the Move On flats to help residents transition to independent living would still fall within the object. Surely transitioning to independent living is residential and involves life skills! And the trustees had taken advice about their VAT liability so were not negligent.

One for the lawyers, this one. And I hope they win!

It doesn't change what I said in my previous post about the need to charities to be vigilant to ensure that that they continue to work within their objects, revised if necessary.

But I do think in this case HMRC appear to be going over the top. And not even saving the taxpayer any money, from the charity's description of how much it's work saves the taxpayer by taking these people out of the welfare/substance abuse/petty crime merry go round.

HHuw Williams is right. I had misread the article to understand that the "residential and life skills centre" was taken from the object of the charity rather the description of the construction. I hadn't checked the charity commission database. Still hope the appeal succeeds.

I write as the recently appointed Head of Finance at the Charity concerned. I took over in June when my predecessor left.

CAH has been registered for VAT since 1973 and has been treated under the legislation applicable to 'hotels and similar establishments'. For those of you unfamiliar with this part of the legislation, it means that we only have to account for VAT on the first 28 days of any individual stay but are then fully taxable for VAT purposes in respect of our housing income. There is a body of tribunal decisions and a European Court case which have upheld this treatment. We also have exempt income in the form of grants and donations but in practice it means we have been able historically to recover roughly 80% of our input tax. It was swings and roundabouts - some quarters we paid HMRC, some we got a repayment.

Before starting the building project at the end of 2014, we had taken advice from a number of sources' all of which agreed that on the basis on which we had hitherto been taxed, we would still be able to recover around 80% of the VAT we incurred on the new building (our builders applied to have it zero rated but there are a number of reasons why it did not qualify). So we started work and wrote to HMRC to advise them that there would be a change in the pattern of our VAT returns. This triggered a visit from HMRC who having looked at our website, where the comment about 'residential and lifeskills centre' appears, decided that we did not qualify for the hotel treatment but that all our outputs were, in fact, exempt, as 'welfare with ancillary accommodation'.

We deliberately use positive language and do a huge amount of work with our residents to get them back on their feet and able to work and live independently. Our success rate is several times the national average for getting homeless people back into work. However, we are still essentially a homeless hostel and hence covered by the aforementioned case law, although I do recognise that each case will be looked at on its merits and nothing can be assumed.

The upshot of all this is that we cannot recover any of the VAT we incur on the new building or on anything else for that matter (apart from a few matched items on the tiny percentage of our income that is still taxable) and now have a £1m hole in our very carefully prepared and fully financed budget for the building. We have taken counsels opinion and and are currently waiting for a date to be set for the appeal.

The objects clause quoted above is from our predecessor organisation, I think. Our current mem and arts refers specifically to the 'provision of shelter, food and clothing and counselling for the benefit of homeless people, destitute people and seafarers (we we were originally a hostel for seamen)

Reading the above I am even more of the opinion that politicians just do not know what is going on. They are of the opinion (confirmed by a chat with our local MP) that being "exempt" is a "good" thing which it can be except when capital expenditure kicks in and then it is an almighty disaster. I am aware that Europe is involved but their politicians are just as ignorant.

... that what does and doesn't qualify seems rather nebulous and hard to quantify. When I spoke with HMRC about this case they were understandably unwilling to comment, particularly with an appeal likely, but it seems a shame in this case that they have not expanded on their decision and given concrete reasons for it - not just for Caritas Anchor House's sake, but for other charities in a similar position who may be left in limbo by this ruling.

The new building does not qualify as a new charitable building (either because it has more than 5% 'business' use, or maybe because it is an extension rather than separate building?)

The new building building does not qualify as 'relevant residential' (because it deemed to be an 'addition' to an existing facility?)

So VAT is accountable at the standard rate, but the charity is denied recovery of (most of the) input VAT on the grounds that the costs are residual, and their PE recovery percentage is very low.

Where the investment in residential accommodation is so significant (indicated by £1m VAT) it seems unreasonable that the VAT inspector deems this element of the 'supply' to be ancillary? (Welfare with ancillary accommodation). Surely (as zero rating cannot apply and the treatment of 'hotel' accommodation with ancillary welfare has been rejected) the 'supply' should at least be apportioned between the 2? In which case this is more Card Protection Plan than a Charity issue(?)